Swatch Group Returns to Profit, Boosted by Strong China Sales
Swatch Group said operating income increased for the first time in four years, as sales of watches and jewelry bounced back in the second half of 2017, boosted by strong demand in China.
The Biel, Switzerland-based group reported on Tuesday that its operating result last year jumped 27.3 percent to one billion Swiss francs, or $1.02 billion, prompting it to raise its dividend back to the level of 2015. This compares with a decline of 44.5 percent in 2016.
“The Swatch Group anticipates further very positive growth in local currencies in 2018, not only from its own distribution channels such as retail and e-commerce, but also from third-party channels,” the company said.
The world’s biggest watchmaker, whose brands range from affordable Swatch watches to high-end Blancpain timepieces, said net sales rose 5.4 percent to 7.96 billion francs. At constant exchange rates, this represented a 5.8 percent increase, beating analysts’ expectations.
The key watches and jewelry segment posted growth of 5.8 percent at constant exchange rates, with December recording the second-best monthly sales on record. Capacity utilization improved in the second half, but orders from third-party brands were still tepid.
Swatch Group registered a “massive” gain in market share in the lower-priced watch segment, which is under intense pressure from the Apple Watch. Sales of watches priced at less than 200 Swiss francs fell 11.6 percent in value terms in 2017, the Federation of the Swiss Watch Industry said Tuesday.
By contrast, Swatch Group reported “impressive” growth rates for Swatch, Flik Flak, Calvin Klein, Mido, Hamilton and Tissot, which has annual sales of more than one billion Swiss francs.
The Swatch brand joined forces with Chinese online sales platform Tmall for a special event on Jan. 12 at the Swatch
Art Peace Hotel in Shanghai, featuring singer and actor Karry Wang as its new brand ambassador. The special model he wore was sold out within hours, with fans thronging boutiques, the group said.
The group recorded the strongest increase in the prestige and luxury segment. Swatch Group highlighted the “extraordinary” performance of jeweler Harry Winston, as well as a very strong acceleration of Omega in the second half.
As official timekeeper of the Winter Olympics in South Korea, Omega is set to incur higher marketing expenses in the first half of 2018, but it will also use the event as a springboard to introduce new models, such as a limited-edition Seamaster. The model celebrates its 70th anniversary this year.
Longines, meanwhile, is on track to achieve sales of two billion francs in the medium-term, the group added.
Swatch Group saw marked growth in China, while sales in Hong Kong — the number-one market for Swiss timepieces — rebounded. Japan posted high-singledigit growth, while the Middle East again saw sales accelerate. In Europe, most markets grew, with the exception of France and Spain.
Overall, Swiss watch exports to China rose 18.8 percent in 2017, while Hong Kong was up 6 percent, the FHS said.
Barclays Bank recently upgraded Swatch Group to Overweight, noting factors such as rising confidence in an improved underlying trading performance, better control over inventory and good engagement on social media channels.
“Today’s results further confirmed our conviction with impressive December sales and a strong January exit rate, which validates the strong trading recovery and should be incrementally beneficial to capacity utilization and consequently to margins in 2018,” it said in a research note.
Luca Solca, head of luxury goods research at Exane BNP Paribas, expressed some reservations.
“We see better prospects for hard luxury in the first half of 2018, and improved short-term prospects for Swatch too in terms of earning upgrades,” he said.
“We prefer Richemont as in Swatch we see a higher risk profile, given its high inventory, uncertainties on third-party production, the smartwatches challenge, and an idiosyncratic management style,” Solca added, referring to Swatch Group’s outspoken chief executive officer Nick Hayek.
The Swiss watchmaker said it expects further very positive growth in local currencies in 2018.